What the Fiscal Cliff Means For You

A perfect storm of macro-economic policy kicked off 2013. The result of laws lapsing from 1997, 2001, 2003, 2010, and 2011 converged on one date; 2013.

1997: The Balanced Budget Act of 1997 mandates cuts to doctor payments if Medicare spending exceeds a certain benchmark. Congress has delayed these cuts for 15 years. If they were not patched this year, doctor payments would have been cut by a third and Medicare patients could be denied care.

2001: The Economic Growth and Tax Relief Reconciliation Act of 2001, aka the "Bush Tax Cuts", reduced federal income tax rates across the board from a top rate of 39% to 35%.

2003: The Jobs and Growth Tax Relief Reconciliation Act of 2003 is part two of the "Bush Tax Cuts". It reduced Capital Gains tax rates (taxes paid on the amount a stock increases in value). The top capital gains rate went from 15% to 20%..

2010: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the tax rates from the 2001 and 2003 tax cuts which were supposed to lapse in January 2011 and extended them two years to January 2013. This is the tax part of the fiscal cliff.

2011: Payroll Tax Reduction: The 6% payroll tax levied on employees was reduced to 4%.
         Budget Control Act: Cuts one trillion dollars from the federal budget over ten years. Half comes from the defense budget and the other half from the non-defense discretionary budget (welfare, education, etc.). 

What do the social classes owe one another? (Economic Philosophy)

Income inequality has become a prime concern for modern economists like Timothy Noah and Joseph Stiglitz, especially after the 2008 financial crisis. This also was one of the main reasons Barack Obama coasted to a second term as president. By attributing former president Bush and the Republican congress's economic policies to producing wealth only for the top income earners, Obama effectively disarmed the Republican claim that their policies would grow the economy.

Or did he?

Obama's claim is that the wealthy have a duty to pay any earnings above what is deemed necessary for a decent standard of living to those who lack a comfortable standard of living. He believes that the social classes owe each other the fruits of their labor. Obama believes that the poor and the middle class already give up their labor for the rich, so naturally the rich should be compelled to give more because they are "free riding" of the labor of the working peoples.

As the President put it, we are our brothers keepers. We exist for the service of one another, helping one another is how we get help from others. Success then is only the result of the toil of others and the wealth from this success should go to the person who produced it. Obama's maligned statement of "you didn't build that" pretty much sums it up.

There is an opposing view on the legitimacy of wealth for on one's own sake, and it is best articulated by the book What the Social Classes Owe to Each Other by William Graham Sumner (from which this post got its name). This book can best be described as economic moral philosophy: what system of wealth distribution should we follow? Sumner proposes the opposite system the president does. He says all we owe anybody who we do not want to give something to  is to leave them alone. That is not to desire taking their wealth by the use of force, whether by citizen or government. Wealth is made by the individual that chooses to work hard and sacrifice some of their earnings today (capital) to invest in a greater future. So they choosing whether or not to make more money are solely responsible for whatever wealth they gain or lose in that transaction. Society should not aid him if he fails, nor punish him if he succeeds, and vice-versa. Minding ones own business means that the only interference with wealth is when that wealth is not made voluntarily by the individual and involves force and/or fraud. So he would argue Bush and the Republican Party's policies even though they made the rich richer are not immoral and subject to government since inequality not stemming from force is legitimate.

Now people like Obama also oppose wealth through fraud. He just believes that physical harm by theft or assault is not the only form of harm in society. Massive wealth accumulation at the top of the income scale also hurts others because it robs others the necessary income to meet their desires for education, transportation, housing, etc. So, government interference with wealth made by nonviolent means is legitimate because wealth not shared harms people by preventing them access to "necessary" goods and services.

In summary, is the non-violent individual responsible for their own success and failure in life or must society take responsibility for social problems like inequality thorough government action? Whatever the answer voters chose to make one house of congress and the white-house populated by these two opposing ideas.

Defense of Usury

Defense of Usury by Jeremy Bentham, a groundbreaking book on practical Economics via amazon.com. Published in 1787, is still controversial today.

Usury, for those who do not know, is the charging on interest on loans. Today it is a common feature of our daily lives. Anyone who has a credit card or has taken out a mortgage knows what usury is. What people don't know was that this practice was banned in Europe for centuries, and is still controversial today.

Bias against interest on loans originates, like all of our knowledge, from the Ancient Greeks. Aristotle believed that it was immoral to charge interest on loans other than for security reasons. He thought that making money off interest was unproductive; money was made not by producing things like farming did but by raising the price on something that was already made. So loaning a bottle of wine and charging interest only enriched the lender and made the borrower poorer. The Catholic church continued the prohibition of usury through the Middle Ages using theological statements about the immorality of the accumulation of wealth for one self.

Bentham's book argued usury was moral because it reflected the preferences of both lender and borrower. Because the borrower agreed to pay, he must believe that this loan plus interest is better then no loan at all. If it truly is predatory, he wouldn't agree to it. Usury also incentivizes people to save money and invest by increasing the return one would receive by lending money to a bank. Remember, people only save if they expect to earn more in the future. Higher interest rates mean more capital for wealth creation.

Bentham's logic is being contested after the financial crisis and the passage of the 2010 Dodd-Frank financial reform act. Supporters of the bill believe that unrestricted interest rates (Bentham's position) take advantage of borrowers lack of knowledge, so government must pass laws to correct this asymmetrical information. It is true that consumers lack information, but how can government made up of regulators with imperfect knowledge make better decisions? Its a paradox for either side of the argument. 

The book is free on Epub for those who don't use Kindle (iphone, ipad, nook people click here)

Is Right To Work Really Free Market?

JD Tuccille of Reason.com has made the unusual argument that Right To Work is actually against the working of the free-market economy (which is what we discuss here).

Right To Work legislation (from the 1947 Taft-Hartley Act) forbids union membership as a condition for employment. In other words you don't have to be a member of the company's union or pay dues to get a job.

Right To Work supporters argue that closed shops (places where you have to be a union member to work at) are bad for the free market economy because they prevent an employer from being able to hire who he wants and an individual to accept employment where they want. They say that this is part of the right to private property, a key part of the market economy in which you keep what you earn. The argument is that unions prevent the usage of private property and limit competitive hiring and pay tactics to better serve consumers.

Tuccille writes that Right To Work actually denies the property rights of the owner by saying that an employer cannot create a closed shop by voluntary contract with a union. So, Right To Work would mean an employee could undermine the employer's desire to have them part of a union.

He also does note that even without Right To Work, it is still not a free market of labor. Labor Unions still get monopolistic protections from the National Labor Relations Board. His prescriptions is to get rid of the NLRB all together and not bother with Right To Work which he believes is hypocritical.

The End of Loser Liberalism by Dean Baker makes the same argument. He makes the case that Right to Work is anti free market as part of his accusation that Conservatives are not truly free market.

Will the Jobs of the Future Be In Healthcare?

A fantastic post by Matthew Yglesias about the future of employment

He theorizes that since the passage of Healthcare Reform (expanding health insurance to the tens of millions of uninsured people) and the retiring of the large Baby Boomer generation, the next high paying jobs will be in the healthcare industry.

His theory is based on the fact that healthcare employment has grown faster as a share of overall employment. Even in the worst part of the recession, employment in healthcare did not go down.

The economic concept of Elasticity of Demand explains why healthcare employment did not go down despite widespread unemployment.

Elasticity of Demand refers to the change in demand due to changes in price.

Usually when income goes down so does expenditures because, obviously, if you have less money you will spend less. However there are certain goods that are so necessary for survival, that a drop in income would not significantly reduce demand.

Healthcare is so important especially to an aging population that people would sacrifice comforts in life to prevent any interruption.

Now you may wonder if everyone is working in the healthcare industry, who will take over the unskilled jobs many of us do now?

Those jobs will be automated, making the cost of those goods and services cheaper by not having to pay employees or have labor or court costs. So we'll have lower prices and better jobs with more security because healthcare cannot be outsourced.

Pushpin is as good as Poetry

18th Century philosopher Jeremy Bentham (who is discussed in our clubs book, Economic Thought Before Adam Smith by Murray Rothbard) said that the only way judge a things value is by how happy it makes someone (meaning its utility).
So pushpin, a simple childrens game with what we call thumbtacks being pushed on a hat, is as great as complex poetry if it makes people happy.

This is a core tenet of modern economics. Things only have economic value if they fulfill someones subjective tastes. There is no objective value in economics except what provides utility. Morality is a different argument. We're just dealing with goods and services.

Now economists in the past disagreed with this. Jeremy Bentham's famous pupil John Stuart Mill (an economist also in our current reading) said that it is better to be Socrates dissatisfied than a pig satisfied. That means it's better to pursue more intellectual ends and be confused than to be content with a simple mind. So a product like a cheeseburger is not as good to someone who hates poetry as Shakespeare? Certainly they would beg to differ. 

Mr. Bentham

Mr. Mill, with the book from which his statement of Socrates and the Pig hails.

Christmas Shopping Does Not Help the Economy

Christmas shopping doesn't help the economy. Only producing things grows the economy. Shopping just

consumes what is already produced. Shopping only helps when there is enough products made to meet the

shoppers demand. That production comes from saving and investment. Shopping gives an incentive to save

and produce but by itself means nothing. Does wanting a computer make one come out of thin air? No, it

must be produced by somebody who has enough savings to make it.

This argument that only producing, not consuming grows the economy comes from Jean-Baptiste Say when he argued against Thomas Malthus.

Think about it, human beings have been wanting things for thousands of years. But most of those desires like food, shelter, and water until very recently had never been met. Those needs were met only when the resources and the capital to produce them were available.